Utilities: From Hero to … Superhero?

The sector's strength has absolutely flared of late

“As you get older, it is harder to have heroes, but it is sort of necessary.” — Ernest Hemingway

On April 10, I wrote an article for InvestorPlace titled “Utilities: From Hero to Zero and Back Again?” in which I noted that “a period of strength may be at hand (for utilities relative to broader markets), but I suspect not in a way that would take the sector back to significant outperformance … if you want to be in equities, utilities may not be a bad place to park some money in the near term.”

I was largely correct about identifying the negative implications that strength in utilities had about broader risk sentiment, as the “mini-correction” has been under way since the first week of April.

Click to Enlarge However, I was incorrect in my initial thought about the magnitude of outperformance in the utilities sector. Take a look below at the price ratio of the iShares Dow Jones Utilities ETF (NYSE:IDU) relative to the SPDR Dow Jones Industrial Average (NYSE:DIA). As a reminder, a rising price ratio means the numerator (IDU) is outperforming (up more/down less) the denominator (DIA).

Notice the immense strength of utilities on the far right of the chart, which has spiked in terms of relative price performance as eurozone fears flared up again. The ratio is behaving as if we are in the midst of another “summer crash,” but stocks in the U.S. have largely been resilient while bond yields have continued to push toward new all-time lows.

The message here is that a lot of defensive positioning is under way internally within the markets. How this resolves itself is unclear, but the idea of positioning into utilities might still be valid for a few more weeks to come as a continued leader among other stock market sectors.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing